ELLIOTT WAVE

An ABC For MID

11/14/07 08:51:12 AMby Arthur HillThe S&P 400 MidCap Index traced out an ABC correction, and a big surge off a key retracement could kickstart a rally.

Security:$MIDPosition:Accumulate

Uptrends consist of advances and pullbacks; it is all part of the natural ebb and flow of price movements. A trend is established when the advances are consistently larger than the pullbacks and prices advance over a period of time. The S&P 400 MidCap Index ($MID) surged from mid-August to mid-October and then corrected over the last five weeks. This correction retraced 62% of the prior advance and the index surged around 850. The pullback is so far less than the advance, and this means it could still be just a correction in an uptrend. See Figure 1.

FIGURE 1: MID, DAILY. The MidCap Index surged from mid-August to mid-October and then corrected over the last five weeks. This correction traced 62% of the prior advance.

Graphic provided by: TeleChart 2007.

The decline over the last five weeks also traced out an Elliott wave ABC pattern. Wave A extended to around 870, wave B bounced back above 900, and wave C declined to around 850. This pattern is typical for corrections and the big bounce off 850 is a start to end this correction. I am marking resistance at 875, and a close above this level would be short-term bullish. Failure to move higher and a move below the November low would be bearish.

FIGURE 2: MID, DAILY. Note that the MACD is based on closing prices. Momentum would turn fully bullish if the MACD moves into positive territory.

Graphic provided by: TeleChart 2007.

Traders can also turn to the moving average convergence/divergence (MACD) for signs of follow-through and an upturn in momentum (Figure 2). The MACD moved below its signal line in October. The indicator trended lower the last five weeks by moving into negative territory. The first positive signal would be a move above the signal line. This could be used to confirm a close above 875. Note that the MACD is based on closing prices. Momentum would turn fully bullish if the MACD moves into positive territory.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.